Franklin Templeton Case: Trustees in Mutual Fund Scheme to take consent of Unitholders before deciding to wind up Scheme, rules Supreme Court

Franklin Templeton Case - Supreme Court - Mutual Fund Scheme - Taxscan

The Supreme Court held that the trustees in Mutual Fund Scheme must take the consent of Unitholders before deciding to wind up the scheme or prematurely redeem the units.

The appellant, Franklin Templeton Trustee Services Private Limited filed the appeal concerning the winding up of its six mutual fund schemes.

Regulation 18 mandates that trustees seek the consent of the unitholders while Regulation 39 allows a close-ended mutual fund scheme to be wound up if the trustees give that opinion. The latter regulation is silent about getting prior consent from the unitholders.

The judgment harmoniously interprets Regulation 18(15)(c) with Regulation 39 (2) (a) of the Securities and Exchange Board of India (Mutual Funds) Regulations of 1996.

The two-judge bench of Justice Khanna and Justice S. Abdul Nazeer harmoniously interprets Regulation 18(15)(c) with Regulation 39 (2) (a) of the Securities and Exchange Board of India (Mutual Funds) Regulations of 1996.

The Supreme Court while opting for a middle path between the two Regulations said that the Principle of Harmonious Construction should be applied in the context of the Regulations in question. This would mean that the opinion of the trustees would stand, but the consent of the unitholders is a prerequisite for winding up.

“The trustees are, therefore, commanded to inform and be transparent. Unitholders are not placid onlookers, imprudent and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unitholders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them. Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected,” the Apex Court observed.

The court reasoned that situations could arise when the trustees may err in their opinion, in which event the unitholders may correct them. Money and investment of the unitholders being at stake, a wrong decision would obviously have an inimical impact on the unitholders themselves. We would brace the argument that a good and intelligible decision of winding up would invariably be accepted by the unitholders.

The Bench observed, “the argument that the unitholders are lay persons and not well-versed with the market conditions is to be rejected. Investments by the unitholders constitute the corpus of the scheme. To deny the unitholders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate.”

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